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Cash in on success but don't let it go to your head.

Too many growing businesses fail to reach their full potential - or just plain fail - because they do not anticipate their cashflow needs adequately, warns accountancy firm Mazard Neville Russell.

But there are some simple calculations that any business owner can do as a guide to growth planning.

'Few people realise that the most common cause of business failures is too much success, rather than too little - they grow too fast to be able to finance the extra business. But you can use a few easy formulae to estimate the amount of cash you might need if you were to take on a new customer,' said partner Mr Andrew Williamson.

'For a start, you would probably need extra stock to supply their needs and you would have to pay for it. You yourself may have to wait to be paid but will still have to pay your suppliers - and if you were to take on not just one new customer but hundreds of thousands, this could easily become a serious cashflow problem if not built into your advance planning.

'What this really means is that growing your business will use up the cash within your business, so it's absolutely vital that you plan ahead for success.'

As a rule of thumb, he suggests, it is useful to start by analysing the gross working capital requirement of the business.

This estimates the finances needed to fund the expected growth due to debtors and stock.

Mazard Neville Russell recommends firms calculate the value of the trade debtors and stock needed to sustain current business and express it as a ratio of total sales. The ratio can then be used to calculate how much extra cash will be needed to support a growth programme.
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Publication:The Birmingham Post (England)
Date:Mar 24, 2000
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